The 4 Types of Crowdfunding

Summary

Crowdfunding platforms like Kickstarter and Indiegogo have revolutionized the way entrepreneurs raise funds, connecting them with a large number of small contributors. While the idea of pooling small investments is not new, the rise of online platforms has made the process more efficient and accessible. These platforms offer four major models: equity-based, debt-based, rewards-based, and charity donations. Crowdfunding has spurred innovation, but also exposed certain challenges. As crowdfunding grows, its potential to disrupt traditional financing methods continues to attract attention from entrepreneurs, investors, and policymakers alike.

Takeaways

• 😀 Crowdfunding platforms like Kickstarter and Indiegogo connect entrepreneurs with a large number of potential backers, making it easier to raise funds.
• 😀 The concept of raising funds from a large number of small contributors is not new; it has been used in different forms since the 1980s, such as in movie funding and limited partnerships.
• 😀 The major innovation of crowdfunding platforms is their ability to leverage the internet's geographic and social reach to connect fundraisers with millions of backers.
• 😀 Crowdfunding platforms typically charge a fee, often a percentage of the total funds raised, in exchange for the services they provide.
• 😀 There are four main crowdfunding models: equity-based, debt-based, rewards-based, and charity-based.
• 😀 Equity-based crowdfunding allows people to sell shares of their company to backers, though it remains a small portion of all crowdfunding activity due to legal and practical constraints.
• 😀 Peer-to-peer lending platforms like LendingClub offer a crowdsourced solution for debt, allowing individuals to lend directly to borrowers, disrupting traditional banking systems.
• 😀 Rewards-based crowdfunding platforms like Kickstarter allow backers to receive a product or service in exchange for their support, which can include creative projects like films, albums, or tech innovations.
• 😀 Charity-based crowdfunding platforms like Causes or Crowdrise allow donations without offering anything in return except for updates on the positive impacts of the donations.
• 😀 Crowdfunding has been growing globally, creating new opportunities for both entrepreneurs and investors, but it also comes with potential risks and shortcomings that need to be managed.

Q & A

What were the traditional methods for shipping a product or launching a company before crowdfunding platforms emerged?

Traditionally, shipping a product or launching a company was an option for those with significant financial resources or those who could attract investment from venture capitalists.

How do crowdfunding websites like Kickstarter and Indiegogo benefit entrepreneurs?

Crowdfunding websites allow entrepreneurs to connect with hundreds or even thousands of supporters who can fund their projects, providing a platform to raise money without relying on venture capital.

Is crowdfunding a completely new concept? What historical examples are given in the transcript?

No, crowdfunding is not a new concept. The transcript mentions examples such as Paul Hogan and John Cornell raising funds from 1,400 investors to produce the movie Crocodile Dundee in 1985, and limited partnerships in the 1970s and 1980s that funded various ventures like shopping malls and oil exploration.

What is the major new element in crowdfunding compared to earlier methods?

The major new element in crowdfunding is the use of powerful internet platforms that connect fundraisers with a vast number of potential backers, reducing the cost and geographical constraints of traditional fundraising methods.

How do crowdfunding platforms generate revenue?

Crowdfunding platforms typically charge a fee, which is usually a percentage of the amount raised in a campaign.

What are the four major crowdfunding models discussed in the transcript?

The four major crowdfunding models are equity-based, debt-based (peer-to-peer lending), rewards-based, and charity-based.

How does equity-based crowdfunding work?

Equity-based crowdfunding allows individuals to sell shares of their company to raise funds. Platforms like AngelList and CircleUp facilitate this model, although it currently represents a small fraction of overall crowdfunding activity due to legal and practical constraints.

What is the role of peer-to-peer lending platforms like LendingClub in crowdfunding?

Peer-to-peer lending platforms like LendingClub allow individuals to lend money directly to borrowers, bypassing traditional financial institutions. This model benefits both savers (who can earn more) and borrowers (who can pay less).

What types of rewards do backers receive in rewards-based crowdfunding?

In rewards-based crowdfunding, backers receive something in return for their support, typically a copy of the product being funded. Kickstarter is the most well-known example of this model.

How do charity crowdfunding platforms differ from other types of crowdfunding?

Charity crowdfunding platforms, like Causes or Crowdrise, do not offer tangible rewards in return for donations. Instead, they provide backers with information and feedback on the impact of the contributions made.

What are the advantages and potential shortcomings of crowdfunding as discussed in the transcript?

Crowdfunding has been shown to promote innovation and wealth creation, but it also has certain shortcomings, such as the potential for fraud or failed campaigns. The transcript encourages further reading to understand these issues in more detail.